Charles Batchelor: Rough justice for a mortgage ‘gamble’

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The Financial Ombudsman Service is doing sterling work dealing with the raft of complaints that have come in about recent misselling scandals. Mortgage endowment claims alone numbered 69,149 in the 12 months to March and are continuing at a similar level – around 250 every working day.

Historically, the ombudsman has upheld about 45 per cent of cases in the consumer’s favour. But this figure is now falling into line with other areas of complaint at 30-40 per cent.

So much for statistics. But I can also bring a personal perspective to bear on this as one of those claimants. Unsuccessful, in my case. Personal finance writers should, in theory, not get into the sort of pickles that they are constantly advising their readers to avoid. But like unhealthy doctors and ill-housed architects, they often do.

If I have an excuse it is that my mortgage was taken out many years before I came to the personal finance beat. You can write confidently about the financial and operational travails of large companies while at the same time mishandling the micro-management of your own finances.

In 1982, when I first took out a UK mortgage, with-profits endowments were the conventional way of financing house purchases. When I increased the size of the mortgage in 1990 it still seemed a sensible way of buying my home.

But markets dived and the with-profits endowment fell out of favour. Endowment providers started sending out warning notices that returns might not be enough to cover the mortgage.

Encouraged by the promotional material from the ombudsman, I got in touch with the company that now owned the adviser that I had originally dealt with. I filed copious information.

Having garnered all this data the adviser went quiet – not to re-emerge until a few days after the ombudsman had told me my complaint had been rejected.

In turning down my complaint, the ombudsman concluded that the endowment policy had been appropriate for my needs and situation. Documents that I had kept on file showed I was given an illustration of two different rates of return – one which would have given me more than enough money to pay off my mortgage, another which would have showed it undershooting.

On the basis of the paperwork, I didn’t have a leg to stand on. Except for the climate in which such calculations were presented even in the early 1990s. Was the impression really given that endowments would not pay off your mortgage? I don’t recall being told that and I certainly did not consider it a possibility. Was it made clear that I was gambling on stock market returns to pay off my most significant purchase? I don’t think so.

As the ombudsman helpfully explained in the rejection letter, with-profits funds make a spread of investments – gilts as well as equities – and build up reserves to smooth payouts even in periods of poor return.

The ombudsman also argued that as I had held other endowment policies since the early 1980s,
I would have received statements for these investments “showing differing bonus amounts and valuations”. I don’t have the paperwork stretching that far back but I strongly suspect those statements showed reasonable returns, confirming that I had made a sound investment. As the whole point of the policy was to smooth out returns, would I have noticed anyway?

There was certainly no indication then that with-profits endowments were not sound. It was not until February 2003 – 21 years after I took out my first policy – that those clever investment managers at my mortgage provider were sufficiently concerned to send me a warning letter.

But, in the view of the ombudsman, taking out a with-profits endowment was not the only sign that I had an appetite for risk. When I extended my mortgage in 1990 I had two shareholdings.

I pointed out that one block of shares had been acquired when the building society where I kept a savings account had demutualised while the others had been bought through an employee share scheme. None of the shares has since been traded. This did not seem to me to be the investment strategy of a gambler.

The ombudsman service is under tremendous pressure to deal with a stream of complaints. Its replies were clear and detailed. But I’m still left with the impression that some of its judgments seem rough and ready.

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